Fri | Sep 22, 2017

Editorial | Tax discussion demands urgency

Published:Monday | July 4, 2016 | 7:00 AM

Having done the initial bit of its tax-reform programme, it is imperative, this newspaper believes, that the Holness administration begins to consult with stakeholders on the other things it has in mind to prevent the kind of policy flip-flop that accompanied the first go at the project and, more important, to have a decent chance of building consensus around what could be problematic proposals.

It doesn't have much time to get the job done; it's a mere nine months until the start of the next fiscal year and when the administration has to have a budget in place.

The Government's declared intent is to rebalance taxation from direct to indirect, which it started in July by lifting the personal income tax threshold to just over J$1 million annually - the first tranche of a push towards J$1.5 million, which it promised in the campaign for last February's general election. But the process of getting here, though, was messy.

At first, the giveback was to come without the need for new taxes. It was supposed to be offset from existing resources. That analysis proved faulty. The administration was forced to concede that what it had in mind was unfundable and that its initially proposed fix would create too many anomalies to make it unworkable.

The solution: a J$13.8-billion revenue levy, including increases in the taxes on fuel to claw back, with a bit of cushion, the J$12 billion that is being given up in income tax. This year's tax package amounts to around 0.7 per cent of GDP.

That, however, is not the end of it. For, as the Government told the International Monetary Fund (IMF) - and which was well known - the second tranche of the income tax reform, pushing the threshold to J$1.5 million next April, will cost a further J$16 billion, or 0.9 per cent of GDP in 2017-18. In other words, meeting the new threshold will carry a cost of J$28 billion, very close to which independent analysts had all along pegged the price.

How the Government fills that gap without undermining the fiscal accounts and the debt-reduction strategy that underpins the country's economic reform programme with the IMF is now the issue, and around which consensus is important if the project is to retain broad support and investor confidence.

 

CARBON TAXES

 

Among the ideas the Government has told the IMF it plans to pursue as part of a comprehensive tax-reform package are "environmental or carbon taxes", for which it says Jamaica is "particularly well suited given its tourism potential". Herein lies, in part, our call for urgent dialogue on the tax programme.

Carbon taxes are not novel. They operate on the premise that those who pollute should pay to compensate for the cost for pollution that the entire society has to bear. Such regimes, however, can be complex to implement and cause acrimonious debate over whether they hinder growth by increasing the cost of doing business, or facilitate it by encouraging new technologies, such as in energy. There is, too, the matter of what kind of carbon-tax regime would be relevant to Jamaica: One in which the Government sets the tax and lets the market determine how much carbon emission is affordable; or caps emission levels and lets the market determine the price.

There is much to talk about.